Ottawa to toughen CMHC oversight

The federal government is toughening its oversight of the country's dominate mortgage insurer as part of new measures for the financial sector that will include giving banks greater access to foreign capital

After earlier voicing concern over the activities of the country’s dominant mortgage insurer the federal government is toughening its oversight of the massive and economically vital organization.

The federal budget took aim at Canada Mortgage and Housing Corp., the Crown corporation that controls about 75% of the mortgage default insurance market. CMHC is backstopped by the federal government but is coming close to breaching its mandated limit of $600-billion because of the red-hot housing market and so-called portfolio insurance for the banks.

“The government will introduce enhancements to the governance and oversight framework of Canada Mortgage and Housing Corp.,” according to the budget.

The document provided few details about what action would take place, but suggested the government was principally concerned about the Crown corp.’s dealings with the banks and how it could impact the broader economy.[np-related]

“The government will propose legislative amendments to strengthen oversight of CMHC and to ensure its commercial activities are managed in a manner that promotes the stability of the financial system,” the budget said.

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans. The practice gets the loans off the bank’s balance sheets and reduces its costly capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

While speaking to reporters last month, Jim Flaherty, the Finance Minister, criticized the extent to which this commercial function of the CHMC had commandeered its lending capacity and core function.

“The issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low ratio mortgages,” Mr. Flaherty said.

“That’s not the way most people usually think of CMHC.”

Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

“A legislative framework will support financial stability”

CMHC currently falls under the jurisdiction of the minister responsible for Human Resources and Skills Development Canada. But sources have indicated the Crown corporation could soon fall under direct supervision of the Office of the Superintendent of Financial Institutions — a powerful financial regulator with the power to enforce a broad range of changes at a financial institution.

Doug Porter, deputy chief economist with the Bank of Montreal, said it sounds like Ottawa wants to clear up who CMHC reports to. “It sounds like they want the finance minister to have the ultimate say on when they believe it is necessary to make changes in policy.”

The budget also stressed it would be moving forward with a legislative framework for covered bonds, which include some loans backstopped by mortgage default insurance and ultimately the federal government.

CMHC will be the administrator of the covered bond program which will be available to federally and provincially regulated mortgage lenders in Canada.

“A legislative framework will support financial stability by helping lenders find new sources of funding and my making the market for Canadian covered bonds more robust,” according to the budget.